Oaktree’s Franks: ‘Enormous’ opportunity in distress

Despite the greater scarcity of traditional real estate investment opportunities, the Los Angeles-based private equity real estate firm still remains bullish about investing in the asset class, particularly in areas of capital dislocation.

Although opportunistic real estate deals are harder to come by these days, Oaktree Capital Management is still finding its sweet spot in distress.

“There’s not a surfeit of fantastic investment opportunities, but there are pockets of opportunities,” said John Frank, managing principal at the Los Angeles-based firm, during an earnings call today. Despite the significant recovery in Class A properties in major markets since the global financial crisis, “there are an enormous number of properties and situations outside of major markets not involving a Class A property, where there remains opportunities in distress, and those are the opportunities that we are seeking.” Among the strongest opportunities are investments that don’t involve the largest properties in a market, as well as nonperforming real estate-related loan portfolios, he noted.

“Even though some of the traditional investment opportunities may be scarcer now, there are these big pockets where capital is just not available or easily accessible by many companies, such as middle- market companies,” added David Kirchheimer, Oaktree’s chief financial and administrative officer, during the call.  “In many areas, such as Europe, we are really capitalizing on that as a provider of capital through a very innovative type of investing – platform investments, as we call them. So, view us and other firms in this business as providers of capital as much as asset managers during periods like this.”

One platform investment highlighted during the call was Oaktree’s 2011 acquisition of Taylor Morrison, the North American operations of British homebuilder Taylor Wimpey, in partnership with TPG Capital. In its IPO last month, Taylor Morrison priced at the top of its range and its stock has since risen 22 percent. “Taylor Morrison is a great example of our contrarian investment approach at work,” said Frank. That investment was executed at a time “when many thought there would never be another home built in America.”  At Taylor Morrison’s current stock price, Oaktree’s funds show a 3.5x multiple on the investment in the homebuilder, he noted.

On the fundraising front, Oaktree has now raised $750 million of its $1.5 billion target for Oaktree Real Estate Opportunities Fund VI, following a third and most recent closing in March, according to its first quarter earnings report. Frank said he expects that the firm will hold a final close for the fund by year’s end. 

Oaktree also said in its earnings results that it officially began marketing its new real estate debt fund, Oaktree Real Estate Debt Fund, in March, with a target of $500 million in commitments. A first close for the fund, which will invest in real estate debt instruments such as commercial mortgage-backed securities, commercial first mortgages, subordinated secured debt, mezzanine loans, corporate debt and residential first mortgage pool, is expected this summer. During its previous earnings call in February, the firm disclosed that it already had raised $200 million in commitments for the fund.